What is Non-dilutive Funding & Is It Right For Your Startup? [2024]

In 2021, the global venture capital market reached an all-time high of $549 billion. However, as we progress through 2024, the market is expected to settle at around $468 billion.

More and more companies are straying away from traditional venture capital. The loss of control and equity has led many founders to seek alternative funding models.

From revenue-based financing to grants and competitions, these alternative financing methods allow entrepreneurs to access capital on their own terms.

This article will dive into the world of non-dilutive funding, exploring its benefits, limitations, and the different types available to startups looking to scale their businesses.

What is Non-dilutive Funding?

Non-dilutive funding is a type of financing that allows startups to raise capital without giving up equity or ownership in their company. This means that founders and existing shareholders can maintain their level of control and ownership while still accessing the funds necessary to grow and scale their businesses.

In the startup world, where capital is often the key to unlocking growth and success, non-dilutive funding has become an increasingly popular alternative to traditional financing methods. It offers entrepreneurs a way to secure the resources they need without compromising their vision or giving up a portion of their company's future value.

Dilutive vs non-dilutive funding

To fully understand the concept of non-dilutive funding, it's helpful to contrast it with its counterpart: dilutive funding. Dilutive funding, which includes venture capital and angel investments, requires startups to sell a portion of their equity in exchange for capital.

While this can provide substantial funds for growth, it also means that founders and existing shareholders will own a smaller percentage of the company, potentially leading to a loss of control and decision-making power. Founders and existing investors also give up a portion of the financial upside, when the company’s value grows.

Non-dilutive funding, on the other hand, allows startups to access capital without giving up any equity. This enables founders to maintain their ownership percentage and control over the company's direction, ensuring that they can continue to steer the ship as they see fit. This also means that any financial upside of a company’s growth will accrue to the founder.

Non-dilutive funding example

One of the most popular examples of non-dilutive funding is revenue-based financing (RBF). With RBF, startups receive upfront capital based on their future recurring revenue. The funding is then repaid over a fixed term, typically 12 months, at a predetermined fixed cost.

For instance, if a startup receives $500,000 in RBF at a 10% flat fee, it might owe a total of $550,000 over the 12-month period, broken down into equal monthly installments.

RBF provides startups with the capital they need to grow without requiring them to give up equity or control. This makes it an attractive option for entrepreneurs who want to maintain ownership of their company while still accessing the funds necessary to scale.

Other examples of non-dilutive funding include grants and bank loans. These funding sources provide capital without requiring equity in return, allowing startups to focus on growth and development without the added pressure of answering to new investors or shareholders.

Pros & Cons of Non-Dilutive Funding

Non-dilutive funding offers a range of benefits for startups looking to grow and scale without giving up equity. But it’s also important to understand both the advantages and limitations of this financing method before deciding if it's the right fit for your company.

Benefits of Non-Dilutive Financing

• Retain full ownership and control: Non-dilutive funding allows founders to maintain complete ownership and control over their company - including retaining corporate board seats, ensuring that they can make decisions aligned with their vision and goals.
• Avoid equity dilution: By not giving up equity, founders and existing shareholders can preserve their ownership percentage and avoid diluting their stake in the company. The main benefits of ownership are financial upside and decision-making control.
• Maintain flexibility: Non-dilutive funding often comes with fewer strings attached, allowing startups to use the funds as they see fit without the need to consult with new investors or shareholders.
• Access to capital without warrants or collateral: Some forms of non-dilutive funding, such as revenue-based financing, do not require warrants or collateral, reducing the risk for founders and their assets.
• Faster access to funds: Many non-dilutive funding options, such as grants and RBF, have quick application processes, allowing startups to access capital more quickly than through traditional financing methods which often take 6 months or longer.

Limitations of Non-Dilutive Financing

• Lower funding amounts: One of the main drawbacks is that the funding amounts available through non-dilutive sources may be lower compared to equity-based financing. Venture capital and angel investments can provide substantial capital for growth, whereas non-dilutive options may have more limited funding capacity.
• Competitive (grant funding): Some forms of non-dilutive funding, such as grants and competitions, can be highly competitive and may have specific requirements or restrictions on how the funds can be used. This can limit a startup's flexibility in allocating capital and may require additional reporting or compliance measures. This can also be true of dilutive funding, such as venture capital, which is traditionally competitive to access.
• Do not offer strategic support: Non-dilutive funding for SaaS companies can lack the strategic support and networks that can come with equity-based investments. Venture capital firms and angel investors often provide valuable mentorship, industry connections, and resources beyond just capital.

However, if your primary goal is to obtain financing without giving up equity, the tradeoffs are well worth it.

Types of Non-Dilutive Funding for Startups

Non-dilutive funding comes in various forms, each with its own advantages and disadvantages.

1. Revenue-based Financing

Revenue-based financing (RBF) is a form of non-dilutive funding where startups receive upfront capital with a flat-rate fee. The funding is repaid over a fixed term, typically 12 months, at a predetermined fixed cost. For example, Efficient Capital Labs (ECL) offers RBF with a flat fee of 10-12%, and funding (up to $1.5 million) can be received in as little as three days.

Pros:

• Quick access to capital - in three days
• No equity dilution
• Flat fees of 10-12% with no hidden costs
• Built for startups: no collateral or warranties required

Cons:

• Recurring revenue required
• Smaller amount of capital to access compared with VC
• VC support such as industry connections not available

If you’re a B2B SaaS company looking to quickly access funding up to $1.5 million with no hidden charges, ECL is where you’ll want to start. The great customer experience is in the numbers: over 75% of customers come back for additional funding.

Get funded today with ECL and experience the benefits of revenue-based financing for your SaaS business.

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2. Small Business Loans

Small business loans are a traditional form of non-dilutive funding offered by banks and financial institutions. These startup loans provide capital to startups based on their credit history, business plan, and financial projections. Repayment terms vary but typically involve monthly payments over a set period.

Pros:

• Retain full ownership and control
• Predictable monthly payments
• Build your business credit history

Cons:

• Strict qualification requirements
• May require collateral or personal guarantees - can be an obstacle for a startup
• Lengthy application process
• May require maintenance of specific financial metrics / ratios over loan term

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3. Merchant Cash Advance

A merchant cash advance (MCA) is a form of short-term financing where a startup receives a lump sum payment in exchange for a portion of its future sales. The repayment is made through a percentage of daily credit card transactions until the advance, plus a fee, is paid off.

Pros:

• Quick access to funds
• No fixed monthly payments
• Flexible repayment based on sales volume

Cons:

• High cost compared to other financing options
• Limited amounts of funding
• Short-term nature - not for longer term strategic funding
• Daily repayment can impact cash flow
• Lack of transparency in fees and terms

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4. Grants

Grants are a form of non-dilutive funding offered by government agencies, foundations, and corporations to support specific projects, research, or initiatives. Startups can apply for grants that align with their business objectives and, if awarded, receive funds without the need to repay or give up equity.

Pros:

• No repayment or equity dilution
• Provides validation and credibility
• Can support specific projects or initiatives

Cons:

• Generally for very early-stage ventures only
• Highly competitive
• Lengthy application process
• Funds may be restricted to specific uses

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5. Venture Debt

Venture debt is a type of non-dilutive financing that combines elements of debt and equity. It’s typically offered to startups that have already raised venture capital and provides additional capital in the form of a loan with stipulations or demands attached.

The demands give the lender the right to purchase equity at a predetermined price in the future.

Pros:

• Extends runway without immediate equity dilution
• Complements existing venture capital
• Longer repayment terms (e.g. 3-6 years)

Cons:

• Generally requires existing venture capital backing
• Warrants can lead to future equity dilution
• Higher interest rates than traditional loans

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6. Crowdfunding

Crowdfunding is a method of raising capital by collecting small amounts of money from a large number of people, typically through online platforms. Startups can use crowdfunding to pre-sell products, offer rewards, or even sell equity to a broad pool of investors.

Pros:

• Access to a wide pool of potential investors
• Builds brand awareness and customer engagement
• Can provide proof of concept and market validation

Cons:

• Requires significant marketing efforts
• Platform fees can be high
• Risk of not meeting funding goals

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More About Non-dilutive Funding

Let’s take a look at some frequently asked questions about non-dilutive funding.

What is an example of dilutive funding?

One of the most common examples of dilutive funding is venture capital. When a startup raises venture capital, it sells a portion of its equity to investors in exchange for funds. This means the founders and existing shareholders will own a smaller percentage of the company after the investment.

For example, let's say a startup is valued at $10 million and raises $2 million in venture capital. In exchange for the $2 million, the startup gives up 20% of its equity to the investors. Now, the founders and existing shareholders own 80% of the company, while the new investors own 20%.

While venture capital can provide significant funds for growth, it's important to consider the long-term implications of equity dilution. As a startup raises multiple rounds of venture capital, the founders' ownership can become increasingly diluted, potentially leading to a loss of control over the company's direction. And that’s why many SaaS startups have turned to non-dilutive funding options, including RBF.

How do you raise capital without dilution?

Raising capital without dilution requires founders to think outside the box and seek alternative funding models. For instance, RBF allows startups to receive upfront capital based on their current financial health and performance. With RBF, startups repay the funding over a fixed term at a predetermined fixed cost without giving up any equity.

One company that offers RBF to B2B SaaS startups is Efficient Capital Labs (ECL), providing businesses with up to $1.5 million in needed funding to grow without diluting their ownership. ECL's RBF model is based on a flat fee of 10-12%, and funding can be received in as little as three days. This allows startups to access the capital they need quickly, without the lengthy process and equity dilution associated with venture capital.

Another strategy for raising capital without dilution is to pursue grants and competitions. Many government agencies, foundations, and corporations offer grants to support startups working on specific projects or initiatives. By securing grant funding, startups can access capital without the need to repay or give up equity.

Startups can also consider small business loans and venture debt as non-dilutive funding options. While these options may have higher interest rates than traditional bank loans, they allow startups to access capital without giving up equity.

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Choose the Best Non-dilutive Financing Option For Your Startup

When it comes to choosing the best non-dilutive financing option for your startup, it's essential to consider your unique needs and goals. Do you need access to lots of capital? Can you afford high interest rates? Are you looking for bridge financing?

The answers to these questions will help make your decision. But overall, most SaaS startups looking to access capital quickly will be able to consider revenue-based financing among their list of options.

It’s the most founder-friendly, affordable, and fast way to access capital. With ECL, you can access up to $1.5 million in funding based on your current annual recurring revenue.

With a flat fee of 10-12%, no equity dilution, and funding available in as little as three days, ECL is the ideal partner for SaaS startups looking to scale without sacrificing ownership.

By choosing RBF with ECL, you can focus on what matters most—building your business and achieving your vision.

Don't let equity dilution hold you back. Take control of your startup's future and explore the power of revenue-based financing with Efficient Capital Labs today.